Abstract
The introduction of institutions of credit information sharing – private credit bureaus and public credit registries – in the market for bank loans represents a possible solution of the information asymmetry problem which most creditors face. However, the possibility of information sharing influences the bank's incentives in two different ways. While it disciplines the borrowers, and therefore reduces the share of bad loans, a bank loses a competitive advantage, the monopolistic knowledge about the data in its clients' credit histories. Does the bank have an opportunity to use the benefits of information sharing without losing its competitive advantage and its clientele? One way to do so is to report false data on borrowers. In this paper, we analyse the bank's incentives to misreport given the bank cannot refuse to participate in the information sharing system, as membership is obligatory. Our main result is that the opportunity to get extra profit and to offer less-expensive credit to new clients explain why banks may prefer a strategy of dishonest behaviour.
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Notes
The case of public credit registry is not the only example of obligatory information sharing. There is no credit registry in Russia, for example, but according to Russian legislation each bank must report the information on its borrowers at least to one private credit bureau.
Positive or negative, depending on the external regulator's requirements.
Analysed in Padilla and Pagano (1999).
The chains are constructed just to make the logic clearer; in our set-up banks make the offers one by one, but cannot observe the offers of competitors and adjust their own ones using this information.
Analysed in Padilla and Pagano (1999).
Because of the symmetry, the results for dishonest bank B will be the same, accurate to the proportion of borrowers who chose the bank in the first period, other things equal.
‘Unlocking Credit. The Quest for Deep and Stable Bank Lending’, The 2005 Report on Economic and Social Progress in Latin America, Inter-American Development Bank, The Johns Hopkins University Press, Baltimore and London, Chapter 13.
According to ‘Unlocking Credit. The Quest for Deep and Stable Bank Lending’, The 2005 Report on Economic and Social Progress in Latin America, Inter-American Development Bank.
For more details on credit reporting systems in Latin America see Luna, 2001, Luoto et al., 2004.
The confirmation of this idea may be found in the release of the speech of chief national bank regulator, Comptroller of the Currency John D. Hawke, Jr.: ‘…borrowers may be rudely surprised when they discover that their good credit history as a subprime borrower isn't reflected in their credit files when they seek credit in the future and that they are unable to obtain better rates based on their good credit record’.
Including the Fair Credit Reporting Act (FCRA) amendments introduced in 1996 and the enactment of Fair and Accurate Credit Transactions Act (FACT Act) in December 2003 among other things aimed to enhance the accuracy of information in credit reports.
Gazeta.ru, August, 2005.
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Acknowledgements
I thank Hans Degryse and all participants at the Conference on ‘Risk, Regulation and Competition: Banking in Transition Economies’, 1–2 September 2006, Ghent, Belgium, for comments on a previous version of this paper. I am grateful to anonymous referees for recommendations on how to improve the paper. I am especially indebted to David Kemme for editing the paper and to Maria Yudkevich and Koen Schoors for helpful advice and support.
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Semenova, M. Information Sharing in Credit Markets: Incentives for Incorrect Information Reporting. Comp Econ Stud 50, 381–415 (2008). https://doi.org/10.1057/ces.2008.10
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DOI: https://doi.org/10.1057/ces.2008.10